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With Casino Stocks, Traders Know When to Fold 'Em

By

Tennille Tracy

Updated April 7, 2009 12:01 a.m. ET

Casino stocks enjoyed considerable gains on Monday, following news
MGM Mirage
MGM 0.39%
was looking to sell some of its properties, but options traders expressed skepticism over the strength and duration of the rally.

Trading in MGM Mirage spiked to eight times normal volume, with investors picking up 62,000 calls that allow them to buy the company's stock and 41,000 puts that allow them to sell it, according to Trade Alert.

Activity picked up after reports MGM Mirage had hired Morgan Stanley to oversee the potential sale of two casinos, the MGM Grand in Detroit and the Beau Rivage in Biloxi, Miss. Such moves would help MGM Mirage pay off debt and finance ongoing real-estate projects.

Shareholders were quick to embrace the news, driving the stock to an intraday high of $6.70, a 44% increase over Friday's close. Options traders, on the other hand, appeared to be heading in the opposite direction.

Several traders showed up to unwind out of April $5 calls, taking advantage of the situation to cash in on earlier bets, while other traders pursued bearish "put spreads" in June contracts. These traders bought June $5 puts and sold June $2.50 puts, paying $1.35 for a position that makes money if MGM dips below $3.65 before June 19.

The stock closed the session at $5.53, gaining about 19%.

In addition to the trades in MGM, there was a noteworthy increase in the implied volatility of the company's options. That reflects uncertainty over the stock's ability to maintain its upward momentum and signals the possibility of retreat.

"Ideally, you'd like to see the stock make a run-up and implied volatility come off at the same time," said TradeKing Options Analyst Brian Overby. "That's a more normal occurrence."

With Casino Stocks, Traders Know When to Fold 'Em

Casino stocks enjoyed considerable gains on Monday, following news MGM Mirage was looking to sell some of its properties, but options traders expressed skepticism over the strength and duration of the rally.